Rebitzer Shares 2012 Best Health Economics Paper Award

BU’s James Rebitzer co-authors “Unhealthy Insurance Markets”

Shares Ken Arrow Award for Paper in American Economic Review

James Rebitzer’s “Unhealthy Insurance Markets: Search Frictions and the Cost and Quality of Health Insurance” has received the 2012 Ken Arrow Award for Best Paper in Health Economics from the International Health Economics Association (iHEA).

Rebitzer is Boston University School of Management Professor of Economics and Public Policy; Everett W. Lord Distinguished Faculty Scholar; and Chair, Markets, Public Policy & Law Department. He co-authored the winning study, which appeared in the August 2011 American Economic Review, with Professors Randall Cebul (Case Western Reserve School of Medicine and Center for Health Care Research and Policy), Lowell Taylor (The Heinz College, Carnegie Mellon University), and Mark Votruba (Center for Health Care Research and Policy and Department of Economics, Weatherhead School of Management, Case Western Reserve University).

“The paper [is] a clear and compelling presentation of important empirical results with implications for current policy…very important and very current.” –Professor Tom Getzen, iHEA Executive Director

In praising the article’s import, iHEA Executive Director Tom Getzen notes, “The paper [is] a clear and compelling presentation of important empirical results with implications for current policy…very important and very current.”

“Unhealthy Insurance Markets” is the first study to estimate the magnitude of search frictions—inefficiencies and heightened administrative costs that stem from employers’ difficulties choosing wisely or easily among the insurance market’s complex and profuse products.

Frictions increase insurance premiums and increase insurance turnover, reducing incentives on the part of insurers to invest in the future health of their policy holders.

The paper analyzes the effects of search frictions on the functioning of health insurance markets, with a focus on the fully insured market. Larger employers can avoid many of the costs associated with search frictions, since they can afford to “self insure,” or hire insurers to administer their plans for them, the authors note. But “smaller and less sophisticated firms generally do not self insure. Instead, they purchase products that provide both administrative services and insurance.” These are “fully insured” firms, and they comprise approximately half the entire US insurance market.

Rebitzer et al show that “frictions increase insurance premiums (enough to transfer 13.2 percent of consumer surplus from fully insured employer groups to insurers—approximately $34.4 billion in 1997) and increase insurance turnover (by 64 percent for the average policy),” thereby reducing incentives on the part of insurers to invest in the future health of their policy holders.

They also explore the publicly financed insurance option, finding that it can improve the efficiency of private insurance markets by reducing search-friction-induced distortions in pricing and marketing efforts. They argue,

“These improvements stem from the fact that a moderately priced public option can displace the relatively small number of insurance policies located on the far right tail of the distribution of premiums. Eliminating this tail has a ripple effect that reduces prices throughout the rest of the market, scales back the incentives that lead to excessive marketing costs, and reduces policy turnover….Our analysis of frictions further suggests that an effective public option would be a simple, well-marketed, and subsidized backstop policy that employers can choose if they don’t find something they like better.”

Since health reform is among the foremost policy and political issues in the United States today, “a better understanding of the causes and consequences of search frictions” is crucial, Rebitzer and his co-authors urge, “for formulating better policy and improving the efficiency of insurance markets.”